Abstract

Addressing the ODM Growth Ceiling

As of 2003, the global market shares held by the Taiwanese LAN industry in the NIC, switch/hub, and SOHO router segments were 77.8%, 52.5%, and 88.4% respectively. Leaving aside the NIC market, with the switch and SOHO router markets now reaching maturity, Taiwanese makers, which have focused mainly on the SME and home user markets, are faced with intense price competition. At the same time, their reliance on ODM/OEM business has made it difficult for them to move up into high-end products, therefore their profit margins have been squeezed.

In the switch market, 10/100M fixed port switches are the Taiwanese makers' main product. The market for high-end Layer 3 and modularized switches is still largely confined to medium-sized and large enterprises; as a result, brand-name vendors such as Cisco, Extreme, Foundry, Enterasys, Nortel, and Alcatel still dominate this segment. These leading international vendors outsource most of their production to EMS providers such as Celestica, Flextronics, Hon Hai, Jabil, Plexus, Sanmin, and Solectrona; the manufacturing of high-end switch products involves a great deal of patented technology, making it difficult for Taiwanese makers to break into the market. Opportunities for further growth in the ODM/OEM segment are thus limited.

As for the SOHO router market, Taiwanese makers currently account for almost 90% of global shipment. In the short term, the continuing rise in the global broadband penetration rate will boost market demand, ensuring continued shipment growth for the Taiwanese makers. However, as SOHO routers develop into a mature product, and as the next generation of home gateway start to appear on the scene, the current business model whereby Taiwanese makers rely on volume growth to ensure shipment value growth will become unsustainable. The SOHO router market is dominated by a handful of leading international retail brands. With manufacturers competing fiercely to secure contracts from leading retail brands, prices will start falling even faster, making it extremely difficult for the Taiwanese ODM/OEM providers to make a profit.

Given that the Taiwanese LAN makers' core competency lies in being able to develop products that meet the needs of SMEs and home users, and given the difficulties in the development of the medium-sized and large enterprise market in the short term, it seems inevitable that Taiwanese LAN makers will eventually be forced to develop their own retail brands. Since ODM/OEM production for brand-name vendors is currently the most important business type for the Taiwanese makers, the development of branded manufacturing will need to be kept separate from their ODM/OEM operations so as to avoid conflict of interest. This situation explains the tendency among the first-tier Taiwanese makers to focus on either branded manufacturing or ODM/OEM.

Integration: The Key to Continued Growth

2003 was undoubtedly a banner year for WLAN. Global WLAN shipment volume rose substantially from 16 million units in 2002 to 39 million units in 2003. 2003 also saw the trend towards integration of wireless function that spread to SOHO router. In 2004, wireless capability will be the main focus of attention for ADSL modem, cable modem, media adapter, and media server, leading to substantial changes in the industry environment.

Increased capital expenditure can be seen both among operators and the corporate sector. With VoIP and network security technology reaching maturity, the market will become more receptive to these two products in 2004. SIP (Session Initiation Protocol) will gradually establish itself as the mainstream standard, solving the interoperability and extensibility problems that affected IP telephony in the past.

Besides the existing firewall and VPN functions, network security products are now starting to incorporate new security functions such as intrusion detection and prevention and application layer filtering. This trend will encourage deployment of these products from the corporate segment, where network security has become an important issue.

With replacement demand of existing network equipment starting to pick up in 2004, the industry will likely see a pronounced trend towards the integration of IP telephony and security functions into existing WLAN devices, switches, and SOHO routers.

Appendix

Research Scope

LAN (Local Area Network) products referred to in this report are network equipment using technology based on the IEEE 802.3 or Ethernet protocols, for use by enterprises or home users. Geographical coverage of this report includes production capacity in Taiwan, China, and India.

Definitions

Product Categories

The LAN products covered by this report include three main product categories: NIC, hubs, switches and SOHO (Small Office Home Office) routers. Other LAN products have been omitted because shipment value for these products is low and in many cases there is a high level of customization. Definitions of the main types of LAN products are given below:

NIC

NIC (Network Interface Card) refers to a printed circuit board used to connect a PC, server, or workstation to a LAN. The NIC works with a computer operating system and network software to act as the interface between the LAN and the bus of the device. The NIC segments transmit messages into packet formats specified by the LAN protocol. Upon receiving data, the NIC reassembles the packets so that the computer receives the full message.

NIC included in this report are exclusively the stand-alone form factor. LOM (LAN on Motherboard) or LAN on chipset form factors do not fall within the scope of this report.

Hub

As a connection device for networks, hubs allow multiple computers to connect and share packets of information. Hubs are responsible for strengthening, controlling, or processing signals as packets are transmitted.

Switch

A switch receives and temporarily stores incoming packets to examine link-layer information such as source and destination MAC (Media Access Control) addresses. The switch decides whether and to which port the packet needs to be forwarded. A switch transfers data based on the destination addresses of individual packets. Unlike hubs, switches divide the network into segments that operate without interference from traffic to any of the other segments. Because multiple parallel connections are supported, bandwidth contention is eliminated and simultaneous transmissions take place, increasing network performance.

Router

Routers control network flow by determining the best routing for data transmission between a transmitter and a receiver. Routers are typically controlled by software and are programmed to provide the most inexpensive, fastest, or least busy of all available routes. Routers operate at layer 3 of the ISO-OSI (International Standard Organization's Open System Interconnect) model. Routers can be further divided by the number and type of network protocols they can support and by the number of ports available for protocol routing.

SOHO routers are targeted for individual users or small and medium enterprises. They are primarily used for network packet routing for network traffic control products such as print servers, network encryption, firewalls, and destination addresses. SOHO routers are alternatively referred to as Internet gateway, Internet server, or IP (Internet Protocol) sharing router.

Business Types

OEM

The OEM (Original Equipment Manufacturing) business model entails carrying out product manufacturing or assembly according to specifications supplied by the customer. The OEM business model emphasizes production efficiency; thus, in order to lower costs, customers outsource manufacturing to OEM providers. This cooperation forms a division of labor among design, manufacturing, and sales.

ODM

The ODM business model entails undertaking product design and manufacturing, but not direct retail sales or brand promotion. ODM providers either collaborate with customers on product specifications or independently design products according to customer specifications; the ODM provider then receives manufacturing orders upon customer approval. The ODM model links the sales capabilities of the ODM customer and the design and manufacturing capabilities of the ODM provider, developing a cooperative division of labor throughout the product's value chain.

EMS

EMS providers focus on the manufacturing and after-sales service end of the value chain; some providers also offer design services. EMS is alternatively called CEM (Contract Electronics Manufacturing); however, the CEM business model mainly focuses on the manufacture of subassemblies, rather than the production of complete products or logistics.

Glossary of Terms